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Strategy
A View From
The Top
Prentice Hall
Cornelis A.
de Kluyver
and
John A.
Pearce II
Third Edition
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
9-1
Corporate Strategy:
Two Main Questions..
 What businesses should we be in?
 What guides the composition of the
portfolio? Why?
 How should the portfolio of
businesses be managed?
 What value added can the center
provide? How autonomous should the
various components be?
Corporate Strategy is About
Creating Long-Term Shareholder
Value
Enduring
competitive
advantage that
provides above
average returns
Successful companies
develop, and then exploit,
an advantage that is central
to success in the industries
where they operate
Successful companies
stay with a well-defined
strategy until the conditions
that provide for competitive
advantage change
Competitive Advantage
Above Average Returns
Successful companies
work to achieve a superior
bottom line for their shareholders
Endurance
Scale and Scope
 Economies of scale: When the unit
cost of performing an activity
decreases as the scale of the activity
increases
 Economies of scope: When the unit
cost of an activity falls as the
underlying asset is shared with other
activities
Horizontal scope
Geographical scope
Vertical scope
Shaping the portfolio:
What is Core?
The Core is what the CEO says it is...
Usually, the definition of Core reflects
differentiable strengths and competencies
Shaping the Portfolio: The
Relationship Between Returns
and Competitive Strength
Shaping the Portfolio:
Distance from the Core
Shaping the Portfolio: Adjacency
and Strategic Risk
Shaping the Portfolio: Types of
Adjacency and Strategic Risk
Shaping the Portfolio:
Strategic Growth Success Profile
Back to Basics: There are Only
Three Avenues for Growth: Build,
Buy, or Bond…
Build – Internal Growth
Buy - Acquisitions
Bond - Alliances
M&A
Growth:
New/Adjacent
Internal/Alliances
Optimize/Revitalize
the Core
Responsibility:
Mix: Corporate and
Business Unit Level
Mostly at Business Unit
Level
Corporate and Business
Unit
The Track Record on Delivering
Consistent Top-Line Growth is Weak…
M&A
Mixed M&A record
Growth:
New/Adjacent
Internal/Alliances
Spotty internal growth
Mish-mash of alliances
Optimize/Revitalize
the Core
Continuous struggle to
revitalize the core
Carefully Selecting an Overall
Growth Strategy Therefore is
Critical
M&A
Growth:
New/Adjacent
Internal/Alliances
Optimize/Revitalize
the Core
What acquisitions? Why?
How much is it worth?
Can we integrate
successfully?
What alliances? Why?
What are the rules?
What is our internal
growth strategy?
Volume, share?
New products/services?
Growth Strategies
 Concentrated growth
Focused on a single business,
market and/or technology
Vertical or horizontal integration
Focused on maximizing returns
from existing opportunities
Diversification
Mergers/Acquisitions
Cooperative strategies
Joint ventures
Alliances
Concentrated Growth
New Ventures
New market
SBU’s
Market
extension
New
business
opportunities
Deeper
penetration
of current
accounts
Existing
market
Existing
products/
services
Product/
service
extensions
New
products/
services
Internal Growth Initiatives Require a
Strong Strategic Focus…
When the core business is growing
rapidly
 Focus on volume or share?
When the core business is thought to
mature and in need of revitalization
 Annuity through additional services?
When the core business is under
attack
 The search for breakthrough solutions?
Vertical Integration
Potential advantages
 Lower buying and
selling costs
 Assurance of supply or
distribution
 Better production or
inventory control
 Technological
capabilities
 Increased entry barriers
Potential
disadvantages
 Capital requirements
 “Balancing”
throughput
 Reduced flexibility
 Loss of specialization
Vertical Integration – Lessons
Learned
Beware of heightened investment
needs
Consider alternatives to ownership
Avoid “part-way” integration
Carefully analyze scale
requirements
Be skeptical of claims of reduced
cost
Diversification
Vertical
Integration
Full
Partial
Single
Business
Related
Diversification.
Cost sharing
Skill Transfer
Unrelated
Diversification.
Risk spreading
Portfolio
management
Related and
Unrelated
Diversification
Post Diversification
Options
More Acquisition
Some Divestiture
Rationalize
Portfolio
Globalize
Retrench/
Refocus
When Does Diversification
Make Sense?
Competitive position
strong
weak
High
Market
Growth
Rate
Low
1.Turnaround
1.Grow (Int’l)
2.Horizontal Acq. 2.Vertical Int.
3.Vertical Int.
3.Related Div.
4.Diversify
5.Sell/Exit
1. Turnaround
1. Grow (Int’l)
2. Merge
2. Related Div.
3. Vertical Int.
3. J.V.s
4. Diversify
4. Vertical Int.
5. Milk/Sell/Exit
Diversification: Three Important
Tests
The Attractiveness Test
The industry chosen must be
attractive enough to yield
consistently strong ROI
The Cost of Entry Test
Is the cost of entry reasonable?
The Better Off Test
What do we bring to the table? What
does the new business bring?
Diversification and Shareholder
Value
RELATED (Strategic)
Ex: Johnson & Johnson
. Drugs
. Baby Products
Diversification
UNRELATED (Financial)
Ex: Textron
. Helicopters
. Insurance
. Consumer Products
Diversification: Rationale…
Related Diversification: 1+1=3?
Competitive Advantage (Cost/Skills)
Economies of Scale/Scope
Strategic fit
Market-related fit
Operating Fit
Management Fit
Unrelated Diversification:
Financial opportunism?
Undervalued companies/assets
Companies with bright prospects that
require an infusion of resources
Financially distressed businesses
Components of a Diversification
Strategy
Corporate Goals (How do we
generate shareholder value?)
“Fit” among businesses (technology,
product, other?)
“Assembly” (Mix of internal/external
growth, methods of financing
growth, target selection criteria, etc.)
Corporate Management
Classifying Diversified
Companies (Specialization Ratio)
Dominant Business Companies
(Microsoft)
70%+ of sales from a single business or
vertically integrated chain of businesses
Related Business Companies (Philip
Morris)
No single business more than 70% of
sales
Unrelated Business Companies (GE)
Conglomerates
Historical Performance
Offensive Unrelated
Diversification generally does
not work; Defensive Unrelated
Diversification may work
Related Diversification is better
than Dominant or Unrelated
Diversification on a wide
variety of performance
measures
Acquisition Strategies Have a
Mixed Track Record …
Successful acquisitions are usually
part of a well-developed corporate
strategy
Diversification through acquisitions
is an on-going long-term process
and patience is a virtue
Successful acquisitions usually
result from disciplined strategic
analysis which looks at industries
first before it targets companies, but
recognizes good deals are firmspecific
Acquisition Strategies Have a
Mixed Track Record …
 There are only a few possible means by
which an acquirer can add value, and
before proceeding on an acquisition, one
should be able to specify how synergies
will be achieved and value created
 Objectivity is essential but hard to achieve
once the acquisition chase ensues
 Most acquisitions flounder on
implementation - strategies for
implementation should be drawn up before
the acquisition is completed and executed
forthrightly after the acquisition closes
A Crucial Distinction is Whether One
Wants to Capture or Create Value
Buying assets for less than they are
worth
Capturing Value
Creating Value
 A one-time benefit
 Requires clear financial rationale - not
merely good “deal-making skills”
 Quick and predictable returns
Managing the combined companies
to create value neither could
alone
 A long-term benefit
 Requires realistic opportunity for synergy
and shared benefits
 Difficult and uncertain returns
Acquisition Strategy: Buy stock?
Assets? Merge?
STOCK PURCHASE
 Advantages
 Simplicity (no title transfers of assets/liabilities:
no issues regarding consent to transfer
contracts; no problems of liquidity)
 Generally favorable tax consequences to the
seller
 Disadvantages
 The buying company assumes all the liabilities
of the target company (may seek indemnification
from target shareholders for undisclosed
liabilities)
 The buying company may have to sell off
“unwanted” assets
 Minority “hold-outs”
Acquisition Strategy: Buy stock?
Assets? Merge?
ASSET PURCHASE
 Advantages
 Often preferred by buyers who wish to selectively
purchase assets (either directly from target
company or through holding company)
 Disadvantages
 Requires substantial legal work
 “Unbundling” of target company’s assets
 Possible third party approvals (contracts, license,
permits)
 Tax consequences generally favor the buyer
Acquisition Strategy: Buy
stock? Assets? Merge?
MERGER
 Forms
 Target company merges into the buying
company (forward merger)
 Target company merges into a subsidiary of
the buying company (forward subsidiary
merger)
 Subsidiary of the buying company merges
into the target company (reverse subsidiary
merger)
 Advantages/Disadvantages
 Simplicity but buying company assumes all
liability
Mergers and Acquisitions Give
Rise to Considerable Integration
Challenges
 How do we achieve the maximum benefits
from this merger or acquisition?
 What are the key strengths and immediate
needs of the new organization?
 How do we maintain current operations and
forge a productive, new organization as
soon as possible?
Three Typical Strategies for
Integration
Type I
Mutual
Integration
 The organizations fully integrate,
adopting the best practices,
systems, and people from both
organizations
Type II
Dominant
Integration
 The acquired organization is
subsumed into the acquiring
organization, with the latter’s
practices and systems remaining in
force
Type III
Limited
Integration
 Both organizations remain
essentially intact, with integration of
selected functions only
Alliances: A Cooperative
Arrangement Between Two or
More Companies Where:
A common strategy is developed
(win-win)
The relationship is reciprocal
(sharing strengths)
Resources are pooled, risked and
shared
Characterizing Alliances
Permanent
Commitment
Transactional
Strategic
Sourcing
Relationship
Annual or
Multiyear
Purchase
Agreement
Commodity
Purchase
Order
No
Linkage
e.g.,
Correspondent
Banks
e.g.,
PowerPC
(Motorola
IBM, Apple)
Cross-licensing
Programmatic
R&D
Partnerships
Collaborative
Advertising
Purchase
Agreement
With Up-front
Funding
Shared
Resource
Shared
Funding
e.g.,
KLM/
Northwest
e.g.,
Caktaxor
Airbus
e.g.,
Japanese
Keiretsu**
e.g.,
Ford/Mazda
Cross
Equity
Shared
Equity
Ownership
Acquisitions
Wholly
Owned
Alliances – Industry Dimensions
Key Alliance Drivers
Dimensions of Industry Characteristics
Key Alliance Drivers
 Risk Sharing
 Economies
Capital Intensive
labor Intensive
Few/None
 Market Access
 Technology Access
Differentiable Products
Commodity-Like
Products
Economies
High Technological
Complexity of Rate of
Change
Low-Technological
Complexity of Rate
of Change
Young Industry with
Embryonic Structure
Mature Industry
with Wellestablished
Structure
 Technology Access
 Risk Sharing
 Funding Constraints
 Supply Risk
Reduction/Sharing
Rapid Sales Growth
 Graphic Access
 Graphic Access
Economies
Market Access
Slow Sales Growth
Economies
Global Industries
Localized
Industries
All
Strategic (Political
Criticality)
Noncritical
Industries
All
Forging a Successful Alliance:
Process
Strategic Intent
Research Potential
Partners
Determine the Organizational
Nature of the Alliance
 Joint Venture
 Collaborative Venture
 Consortia
Consideration of Alternative
Entry Modalities
Determination of Partner
Selection Criteria
Determine the Operational
Criteria
 Investment & Management Sharing
 Outcomes, Benchmarks and Time
Frame
 Evolution &Dispute Resolution




Don't Enter
Export
Licensing
Wholly-Owned
Subsidiary
 Strategic Alliance
 Strategic Fit
 Cultural Fit
 Return/Risk
Factors Affecting the Successful
Management of Strategic Alliances
 Commitment
 Mutual Trust
 Sensitivity to Company Culture
 Lower Level Management Commitment
 Sensitivity to National Culture
 Wide Dissemination of Information
 Effective Dispute Resolution Mechanisms
 Congruent Goals
Failure is Not Uncommon...








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Too Many Parties Involved in Decision Making
Conflicting Cultures
Conflicting Strategic Intent
Incompatible Personalities
Lack of Performance on the Part of the Alliance
Partners
Lack of Trust
Changing Environmental Circumstances Lead to
New Goals
Inability to Master the Transfer of Skills/Knowledge
Benefits/Costs of the Alliance Skew Towards One
Partner
Potential Pitfalls in Forming
Strategic Alliances
Opportunism
Knowledge Expropriation
Preclusion of the Strategic
Imperative
Obsolescence
Retrenchment: An Occasional
Necessity
DISINVESTMENT
STRATEGIES
Sell-offs
Spin-offs
Liquidations
Strategy
A View From
The Top
Prentice Hall
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America.
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
9-43